Stealth tax raid to add £15k to cost of a ‘comfortable' retirement
Income tax thresholds are frozen until 2028, but Sir Keir Starmer has refused to rule out extending the freeze beyond this date.
A single pensioner needs disposable income of £43,900 for a 'comfortable' retirement today, according to trade body Pensions UK.
But higher living costs and a two-year extension to the tax threshold freeze would mean this figure rising to £58,860 by 2030 – £14,960 more than today.
Income tax thresholds were frozen from 2021 until 2028 under the Tories. The policy has dragged millions more taxpayers, including pensioners, into higher brackets as inflation pushes up incomes in a process known as 'fiscal drag'.
Rachel Reeves has committed to keeping thresholds frozen until at least 2028. But the Chancellor and the Prime Minister have refused to rule out an extension as the Government fights to fill a £22bn fiscal 'black hole'.
A 'comfortable' retirement is defined by Pensions UK as having enough money for luxuries such as regular beauty treatments, theatre trips and a two-week holiday in Europe every year, with around £70 to spend on groceries and £60 on meals out per week. It assumes the retiree owns their own home and is mortgage-free.
In 2019-20, £33,000 of expenditure was needed for a single pensioner to maintain this lifestyle, requiring an income of £38,125.
However, the rising cost of energy, groceries, holidays and driving means they now need to spend £43,900 a year to achieve a 'comfortable' retirement, requiring an income of £52,220.
If the disposable income required continues to rise by the annual average of 6pc each year, and income tax thresholds remain frozen, the same pensioner will need to spend £58,860 by 2030, requiring an income of £77,153.
Sir Keir told Prime Minister's Questions on Wednesday that he stood by his party's manifesto pledge not to raise taxes on working people.
But he refused to say whether the freeze on income tax thresholds would be extended beyond the 2028 expiry date. The freeze is considered a stealth tax as it raises revenue for the Treasury without increasing headline income tax rates.
U-turns on winter fuel payments for pensioners and cutting disability benefits have piled pressure on the Government's spending plans, with economists saying tax rises are now likely in the autumn Budget.
Alan Barral, financial planner at Quilter Cheviot, said: 'Frozen income tax thresholds may feel like a technical detail, but they have real consequences for retirees whose standard of living is being squeezed.
'As incomes creep up to keep pace with inflation, more of that income ends up being taxed, effectively reducing spending power year after year.
'With the UK facing significant fiscal challenges, there's a real risk that Rachel Reeves may feel compelled to backtrack on Labour's pledge to unfreeze thresholds.'
Baroness Altmann, a former pensions minister, warned that an extension of the freeze would have the greatest impact on the poorest retirees whose state pensions would start to breach the £12,570 tax-free personal allowance.
She added: 'Taxing these pensioners for perhaps a few pennies will be an administrative nightmare and cause distress and upset.
'The longer thresholds are frozen the more people will be dragged into the tax net – and the more people will really suffer.'
A government spokesman said: 'We are committed to helping our pensioners live their lives with dignity and respect, which is why in April the basic and new state pension increased by 4.1pc.
'Pensioners will receive a boost of up to £470 to their income in 2025-26. Our commitment to the triple lock means millions will see their pension rise by up to £1,900 this parliament.'
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